Medicaid, pension costs create budget complications for U.S. states: report

NEW YORK (Reuters) - A sluggish forecast for U.S. economic growth as well as an increase in U.S. states’ Medicaid and pension contribution costs is creating a budgetary squeeze in many state capitols, according to a research report issued by S&P Global Ratings on Monday.

FILE PHOTO: The dome of the U.S. Capitol is seen in Washington September 25, 2012. REUTERS/Kevin Lamarque

While the risk of a recession within the next 12 months has fallen into a 15-20 percent range from 20-25 percent, the rate of economic expansion “is expected to remain fairly anemic at 1.8 percent over the longer term (roughly 10 years), well below the 3.0 percent average growth rate that prevailed from 1980 to 2000,” the report said.

“And while the risk that federal policy could trigger a recession has eased, the potential for a dramatic scaling-back of federal aid for Medicaid has never been greater,” the report said.

The slow-growth economy is producing sluggish revenue trends for the states, said Gabriel Petek, an analyst at S&P, in a telephone interview.

S&P does not expect Washington will enact a federally funded public infrastructure package in the next two years, which will put further stresses on state budget management.

Addressing deferred maintenance and inadequate capacity in public infrastructure will depend heavily on state and local government solutions, the report said.

Without a possible bump in growth from a federal infrastructure package, projected GDP growth for 2017 was lowered to 2.2 percent from 2.3 percent, the report said.

“Anything that is done at the federal level would imply that more of the burden has to be picked up by the state and local government level in the area of infrastructure investment,” Petek said.

The report added that the U.S. mid-Atlantic region (New Jersey, New York and Pennsylvania) will have the slowest growing economy compared to other regions. Real GDP growth for the region is projected at 1.25 percent for 2017, the report said.

The best performing region forecast for the current year, with an economic growth forecast of 2.88 percent is the Mountain region (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming).

Overall, regional economies growth rates are expected to peak in 2018 before some of those gains ebb, the report’s data showed.

The best performing region forecast for 2018 are the states in the West South Central region (Texas, Oklahoma, Louisiana, Arkansas) with a combined growth rate of 3.36 percent, followed closely by the Mountain region at 3.29 percent and Pacific region at 2.93 percent.

Reporting by Stephanie Kelly; Editing by Daniel Bases